Japanese economy is going backwards

THE Japanese economy contracted almost twice as much as forecast
by analysts in the second quarter, hardening speculation the
central bank will refrain from raising interest rates this
year.

However, taking the first two quarters together, the economy is
still expanding overall, and growth is expected to continue, albeit
at a sluggish pace.

The economy shrank at a 1.2 per cent annual rate in the three
months ended June 30 as business spending slumped, the Cabinet
Office said in Tokyo yesterday. The Government initially forecast
0.5 per cent expansion.

Bond yields fell to the lowest level since February last year on
speculation the central bank would keep its key overnight lending
rate at 0.5 per cent to prevent the economy from falling into
recession. Any rebound in growth depends on the severity of the
housing slowdown in the US, Japan's biggest export market.

"A move by the Bank of Japan is out of the question," Takehiro
Sato, chief economist at Morgan Stanley in Tokyo, said. "A cloud is
hanging over the domestic and global economy."

Economists contacted by Bloomberg News said the economy would
recede at a 0.7 per cent annual pace.

The economy contracted 0.3 per cent from the previous quarter.
The Cabinet Office revised the data to show that the last time the
economy shrank was in the third quarter of 2006, when it fell 0.1
per cent from the previous three months.

Even after the drop, the economy expanded at a 2.5 per cent
annual pace in the first two quarters, the Government said, higher
than the economy's potential growth rate of 2 per cent.

"There is no change in Japan's economic trend overall," the
Finance Minister, Fukushiro Nukaga, said in Tokyo yesterday. "We
expect that the economy will continue its long-lasting growth."

Capital investment declined 1.2 per cent, reflecting a report
last week that showed spending by companies unexpectedly slid in
the period. Public investment was revised to a 2.6 per cent drop
from the previous estimate of a 2.1 per cent slide.

Business and consumer spending were the main drivers of growth
last year, reducing the economy's reliance on exports.

Gains in household spending in the second quarter helped counter
the decline in corporate outlays. Spending by consumers, which
makes up half the economy, was revised to show a 0.3 per cent
increase, from an initial estimate of a 0.4 per cent gain.

There are some indications the economy will accelerate again,
albeit at a slower pace than some economists had been
forecasting.

There are enough warning signs to suggest that the rebound may
be rather weaker than usual.